Regulation of the Australian financial services industry is fragmented: between the commonmwealth and states and between organisation type and activity type. The new government has set itself a huge task of improving productivity and efficiency by reforming regulation.

Set out below is Part 1 of an edited version of the article which gives an overview of the current laws. Part 2 is here.

Australia’s financial services regulatory framework — an overview

Recent concerns over margin lending, short selling and stock lending in Australia have intensified the debate about the division of regulation between the country’s federal and state jurisdictions. The discussion has highlighted the fact that Australia is a federation of six states and two territories, all of which play a part in financial services regulation. This has inevitably led to a patchwork of different regulatory frameworks in some areas, not to mention the potential for gaps to appear. In recent months, the concerns over these regulatory gaps and overlaps have forced the various levels of government to agree to reform this fragmented regulatory model.

Senator Nick Sherry, federal minister for corporate law and superannuation, told a recent industry event that "The Productivity Commission has been clear in its recommendation that the commonwealth take over regulation of credit. Further, the Council of Australian Governments recently agreed in-principle to the commonwealth assuming responsibility for regulating mortgage credit and advice as well as margin loans, with a view to reassessing the regulation of other credit arrangements in due course" .

He added that the sub-prime meltdown and ensuing credit crisis had highlighted the need to tighten regulation in certain areas. "We have seen the global effect of easy access to credit and we need to ensure domestically that access to finance is governed by appropriate regulation to protect our market and consumers as best we possibly can from the difficulties currently being experienced elsewhere."

Sherry told his audience: "Australia needs a financial services regulatory structure for the 21st century, one which provides the highest standards of conduct, product disclosure and advice at a national level. Simple, standard and consistent regulation can only be achieved at a national level by one government rather than by six states and two territories."

This article reviews Australia’s regulatory landscape. Part 2 lists the main areas of future change.

Fragmented regulation

Although the Australian Constitution gives some financial services regulatory powers to the commonwealth, in other areas the commonwealth and the states must act cooperatively to achieve consistent national regulation. As a result, the regulation of financial services in Australia is sometimes by function and sometimes by type of organisation; sometimes it is national and sometimes state-based. Businesses wishing to operate in Australia therefore need to be mindful that a specific activity that they carry out may be regulated — even if their organisation type is not.

For example:

• Financial products and services, deposit-taking, payment facilities, banking and insurance are commonwealth regulated but regulation of credit is a state-based power. Commonwealth regulated financial service providers require an Australian Financial Services Licence issued under the Corporations Act 2001 (Cth).
• Under the Banking Act 1959 (Cth) only a body corporate that is authorised can carry on a banking business in Australia. A body corporate that is granted an authority to carry on a banking business in Australia is referred to as an authorised deposit-taking institution, or ADI. Only certain ADIs can call themselves "banks", "credit unions" or "building societies".
• The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) applies to a wide range of financial services providers, the gambling industry and others.
• Consumer credit regulation may vary from state to state.
• Land title and personal property security systems currently vary from state to state.

This regulatory overlap, underlap and duplication has become a priority for the federal Labor government that won office in December 2007. It has the significant advantage, in terms of its reform agenda, of being uniquely positioned with Labor governments in power federally and across all states.

This overview summarises the current position and identifies the key areas of likely change.

Overview

Regulatory agencies

The three main regulatory agencies ("the three pillars") for the financial system in Australia
are:

• Reserve Bank of Australia: The RBA is responsible for monetary and banking policy, the stability of the Australian economy and promoting the safety and efficiency of the payments system. The RBA regulates purchased payment facilities.
• Australian Prudential Regulation Authority: APRA is responsible for the prudential regulation and depositor protection of banks, credit unions and building societies under the Banking Act, as well as insurance companies and superannuation funds.
• Australian Securities and Investments Commission: ASIC is Australia’s corporate, markets and financial services regulator and supervises consumer protection in the financial services sector. It has responsibility for monitoring and reviewing the Electronic Funds Transfer Code of Conduct. ASIC is also responsible for registering companies, issuing Australian financial services licenses and monitoring fund raising.

There are memoranda of understanding between the regulators to share information and limit regulatory overlap. They also sit on the Council of Financial Regulators.

Other regulatory agencies include:

• Australian Competition and Consumer Commission: The ACCC administers commonwealth competition, fair trading and consumer protection laws. The commission also controls mergers. The responsibility for financial services consumer protection, meanwhile, belongs to ASIC.
• Australian Taxation Office: The ATO is the government’s principal revenue collection agency.
• Australian Transaction Reports and Analysis Centre: Austrac is Australia’s anti-money laundering and counter-terrorism financing regulator and specialist financial intelligence unit.
• Australian Securities Exchange: The ASX operates the Australian Stock Exchange and Sydney Futures Exchange, as well as monitoring the compliance of market participants (brokers) and listed entities with its Operating Rules. Its market supervision function is under review.
• The Office of the Privacy Commissioner: The OPC administers the Privacy Act (Cth) and related legislation to protect personal information (including credit information).
• Foreign Investment Review Board: The FIRB examines proposals from foreign interests to undertake direct investment in Australia and makes recommendations to the government on whether those proposals are suitable for approval under the government’s policy.

Australian Financial Services Regulation Law

The Corporations Act 2001 (Cth) introduced a single licensing regime for financial sales, advice and dealings in relation to financial products and requires consistent and comparable financial product disclosure.

A person can provide a "financial service" in the following ways:

1. providing financial product advice
2. dealing in a financial product (including deposit accounts)
3. making a market for a financial product
4. operating a registered scheme
5. providing a custodial or depository service

"Financial product advice" means a recommendation, a statement of opinion, or a report of either of those things, which is intended to influence a person in making a decision in relation to financial products.

What is a ‘financial product’?

The general definition of a "financial product" is a facility through which a person does one or more of the following:

* making a financial investment
* managing a financial risk, or
* making a non-cash payment

This includes deposit and payment facilities and products sold for third parties — either consumer or business.

Making a non-cash payment

A "non-cash payment" covers payments other than by physical delivery of currency.

Examples include facilities for making payments by cheque, direct debiting of deposit accounts, purchased payment facility (smartcards), travellers’ cheques and electronic cash arrangements. Excluded from this category are credit cards, payment systems, bank cheques and bank guarantees.

The meaning of purchased payment facility and holder of the stored value is contained in the Payment Systems (Regulation) Act 1998 (Cth) which is regulated by the Reserve Bank.

Who requires a licence?

Any person carrying on a business of providing financial services will require an Australian financial services licence.

The Act draws a distinction between financial services provided to retail and wholesale clients. Generally, the consumer protection provisions under the Act will apply only to financial services provided to retail clients, as it is recognised that wholesale clients do not require the same level of protection.

ASIC may issue banning orders or vary, suspend or cancel conditions for a licence.

Misleading conduct issues

Australian law imposes significant obligations on companies, their staff and representatives regarding their conduct when promoting products and services. In particular, a corporation must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.

This means they must not act in any way that is likely to give prospective agents or customers an impression about the company, or any of its products or services, which is false or only partly true.

Advertising services or conducting a seminar while unlicensed could be misleading conduct.

The obligation to avoid misleading or deceptive conduct is extremely broad and covers all kinds of conduct. Some specific examples are as follows:

1. You should not indicate that a person will be entitled to any benefits where those advantages are conditional or otherwise may not be available.
2. You should not indicate that certain benefits or   advantages, or other terms or conditions, are available when they have expired or ceased being available. In this respect, you should ensure you always relay only up-to-date information about the company.
3. You should not mislead any prospective agents or customers about the nature, characteristics or suitability for the person of products.

Fund raising

Unless an entity is an authorised deposit-taking institution, raising funds in Australia may be unlawful without a complying disclosure document. The Corporations Act has extensive requirements in this area.

The Financial Services Working Group is reviewing the quality, complexity, length and range of disclosure documentation with a view to simplifying these documents.

Treasury is also considering the introduction of a product rationalisation mechanism to protect the interests of investors moving out of outdated managed investment products and into modern ones.

Financial services dispute resolution

It is a standard condition of an AFS licence that the licensee belongs to an approved external dispute resolution scheme to resolve customer complaints.

The Banking and Financial Services Ombudsman is approved by ASIC as an external dispute resolution scheme for financial services licensees. The BFSO reports to ASIC on systemic issues that are identified in its dispute resolution work.

From July 1 2008, the dispute resolution function currently conducted by the BFSO will be conducted by a new company, Financial Ombudsman Service Limited, which will merge the BFSO’s operations with those of the Insurance Ombudsman Service and the Financial Industry Complaints Service.

The combined service will deal with complaints involving:

* banks
* other deposit-taking institutions (credit unions,building societies)
* finance and mortgage brokers
* financial planners
* stockbrokers
* general Insurers
* fund managers
* life insurers

Regulation of credit

Consumer credit is regulated under the Uniform Consumer Credit Code, which is uniform state-based legislation.

The policy basis of the UCCC is "truth in lending" and its objectives are to:

* Provide meaningful disclosure to debtors, mortgagors and guarantors at relevant pre-contractual, contractual and post-contractual stages.
* Ensure that the cost of credit is disclosed to prevent deception.
* Enable comparisons between products, and encourage competition.
  *Achieve product flexibility by regulating substance not form.

The UCCC applies to credit:

* Provided to a natural person or a strata corporation.
* Wholly or predominantly (more than 50 per cent) for personal, domestic or household purposes.
* For which a charge is or may be made for providing the credit.
* Where the credit provider is in the business of providing credit or credit provision is incidental to its business.

Significant penalties apply to non-compliance with the code.

Anti-money laundering

The reporting requirements for financial service providers will come into effect on 12 December 2008 relating to:

* suspicious matters
* international funds transfer instructions
* threshold transactions (i.e., physical cash or e-currency of $10,000 or more, or any other thresholds provided by regulations)

Until the AML/CTF Act reporting requirements come into effect, transaction reporting requirements for businesses and cash dealers under the Financial Transaction Reports Act 1988 (Cth) will continue.

Financial services marketing

Marketing is regulated by the ASIC Act (Cth), the Trade Practices Act (Cth), Spam Act (Cth), the Do Not Call Register Act (Cth) and state-based laws dealing with trade competition and fair trading.

Privacy

A major privacy review is underway which includes the consideration of the introduction of data breach notification laws.